BRAZIL’S economy virtually crashed last year owing to a collapse in global commodity prices, a
widening budget deficit, stubbornly high inflation and the corruption scandal at the state-controlled oil company.
Most predictions now suggest the economy will shrink by 3.9pc this year, following last year’s 3.8pc contraction, the worst in 25 years. If this happens, it would make 2015 and 2016 the first back-to-back years of contraction since the 1930s.
As Latin America’s largest economy struggles with political turmoil that is likely to obstruct policy measures needed to lift it out of the steep and lengthy downturn, the OECD expects Brazil’s recession to extend into 2017.
The country needs simplification of indirect taxes, easing of trade barriers and improved competition to revive business and consumer confidence.
The government plans to cut spending and reduce budget deficit in 2017, now at above 10pc of GDP, and expects the economy will return to growth next year after a two-year contraction. It expects GDP to expand 1.2pc in 2017 after contracting by 3.8pc this year.
The finance ministry is of the opinion, the economy may stabilise in the third-quarter and rebound by end of year as the government focuses on initiatives to boost investment, expand credit and keep jobs.
Consumer and investor confidence levels have rebounded this year from record lows. However, private-sector credit problems signal no turnaround in sight as yet with the central bank holding interest rates. The nation’s nominal budget deficit reached 10.8pc of GDP in January, its highest on record, as gross debt climbed to 67pc of GDP.
However, both, OECD and IMF forecast stagnation next year, which would mean no growth until 2018.
The slight improvement in GDP data for the first-quarter is supporting an upward revision.
However, despite the change in leadership, the economy is expected to remain in a profound recession this year. Focus Economics panelists see the economy recovering slightly and growing 0.8pc in 2017.
According to the Institute of International Finance, Brazil’s once high-flying economy is currently impaired by a political crisis. It could be another year of recession if the political situation does not improve.